Investment firms snap up southwest Florida homes

Published: Saturday, June 15, 2013 at 11:33 p.m.

Last Modified: Saturday, June 15, 2013 at 11:33 p.m.

Two of the largest real estate investors in the country are manipulating home values across Southwest Florida through rapid price inflations that could form another bubble here, an analysis shows.

The Blackstone Group and rival Colony Capital have bought 522 single-family homes from Parrish to North Port since last fall, spending nearly $84 million on those deals, according to a Herald-Tribune review of property records.

The shopping spree — involving prices that are tens of thousands of dollars above free-market norms — is part of a larger plan by the two giant hedge funds to soak up an already tight housing stock, convert properties into rentals and ultimately dictate area rents.

The strategy has created a slew of potentially adverse impacts — from fewer short-sale approvals to a rise in home squatters and bidding wars among buyers — all resulting in what some analysts consider dangerously false inflation.

Most notably, experts fear that the private equity firms are squeezing traditional buyers out of the market through conditions that mimic those of the bubble-bust cycle that shook Florida's economy six years ago.

"They're out to buy as many homes as they can, and price is no longer a factor," said Jack McCabe, a real estate consultant in Deerfield Beach.

"We're shifting from a market controlled by individuals to one that's controlled by institutions, and that's very dangerous. They have great potential to manipulate prices."

Affiliates of Wall Street's Blackstone Group began buying real estate in Southwest Florida in October as part of a larger plan to acquire as many as 25,000 distressed single-family homes nationwide — residue of the Great Recession.

Its top U.S. competitor, California investment giant Colony Capital, joined Blackstone at the auction block this spring.

In all, Blackstone has spent $37.56 million in Manatee County acquiring 219 single-family homes — at an average price of $171,491.

It snapped up another 175 houses in Sarasota County, shelling out $23.68 million, or some $135,313 per property, according to a Herald-Tribune review of court records.

Colony, which began buying properties here after Blackstone and has been more active than its rival of late, has bought 88 properties in Manatee for a total of $15.6 million, at an average cost of $177,302 per home.

In Sarasota County, Colony has struck deals on 40 single-family homes for $7.03 million — $175,843 per deal.

If the Blackstone and Colony deals sound ambitious, it's because they are.

The 522 purchases by just these two companies during the past eight months equal roughly 9 percent of all the single-family homes in Southwest Florida that changed hands in that time, the Herald-Tribune analysis reveals.

Smaller copycat investors, including New York's Fundamental REO and Minnesota-based Harbors Investment Corp., have picked up hundreds more homes — pushing the corporate control of the market to higher levels than perhaps ever before.

While the purchases began as self-financed deals by well-heeled investment firms, lately the institutions have turned to banks for capital, borrowing billions to finance their deals.

At the same time, what started as bargain-basement buys at foreclosure auctions has shifted to higher-priced short sales, traditional Realtor listings and even purchases from local flippers.

If they continue, the deals could have widespread ramifications for individual buyers.

Outgunned

Most troubling to some, the firms routinely outbid owner-occupiers by paying significantly more for houses than what the same properties fetched just months earlier.

Colony, for instance, bought one home in May for $172,000. The same residence sold the previous November for $64,000 — a markup of 275 percent in six months.

The two-bedroom, one-bath home measuring 1,013 square feet was built in 1956 and valued by the county at $66,500 last year.

Colony took the same tack when it bought a home in Venice in April for $136,000 — an appreciation of $62,500 over its last sale, shortly before Christmas. Then, it sold for $73,500.

The company has done the same in Sarasota, with properties on Fiesta Drive and elsewhere; similar buying patterns can be seen across Colony's local transactions, records show.

Representatives from Colony Capital could not be reached for comment.

A spokesman for Blackstone's home buying and rental subsidiary said the firm does "an incredible amount of due diligence on every purchase."

But the Herald-Tribune's analysis shows Blackstone, too, has overpaid — sometimes significantly compared with market rates — for many of its homes.

In May, it paid $265,000 for a five-bedroom in Sarasota that was built in the 1980s. That same house changed hands just two months earlier for $185,000.

Blackstone spent $142,000 for a home on Radnor Place in Sarasota in January. Less than two months earlier, the 1,400-square-foot house went for $79,000.

More recently, Blackstone bought a three-bedroom Hawkshead Park house for $270,000. Five months earlier, another investor paid $200,000.

With dozens of similar examples of Blackstone purchases in excess of market rates, some Realtors fear the region could again be crippled by the artificial price appreciation that was a staple of the mid-2000s real estate run-up.

"These purchases are ridiculous," said Robert Goldman, a Realtor, real estate attorney and developer in Venice. "I think the strategy is going to backfire in their face. I just don't see how they can charge enough rent to recover these prices."

Skewed prices

Already market watchers say they are concerned that Blackstone's purchase prices have influenced so-called "comparables" — similar transactions that appraisers use to value homes.

The more houses Blackstone buys at inflated prices, experts say, the more those prices will be used as a gauge to the value of all other similar properties nearby — a phenomenon that could skew prices throughout the market.

Institutional deals have also resulted in a sharp decline in housing inventory, prompting some buyers to make panicked offers out of fear that they will be priced out, said Drew Peterson, a foreclosure specialist with the Re/Max Alliance Group in Sarasota.

"I never thought this was a good thing for the housing market, and I'm concerned now more than ever," Peterson said.

"It's false inflation. These homes are becoming less affordable, and people are buying houses because they feel like they have to."

Peterson said institutional investors like Colony and Blackstone often rely on local real estate agents to scout properties.

But those agents may use formulas not based on worth, but on what a home can produce from collected monthly rents. The target is 8 to 12 percent.

Bulk buyers last year paid an estimated 45 percent more than assessed value for the 5,289 foreclosures they bought in Florida. As more of those institutions now turn to short sales and traditional listings, industry analysts believe prices will balloon marketwide.

"These big companies are paying way over market in general," said Shannon Moore, broker and owner of Green Lion Realty, which works with smaller competing investors in North Port. "What they're paying at auction is ridiculous. It definitely seems like they could be creating another false bubble."

Not on its best day

Philip Muzi sold his home, in the Wellington area of West Palm Beach, to a Blackstone subsidiary earlier this year.

He bought it new in 1999 for $250,000, and later added a pool. Even with five bedrooms, three bathrooms and 3,000 square feet under roof, it is among the smaller homes in his neighborhood.

When Muzi fell behind on his Bank of America loan, he tried a short sale but was unsuccessful on three different occasions. Bank of America ultimately transferred the mortgage to Bayview Loan Processing, in Miami.

Muzi got an offer to sell for $360,000, but Bayview rejected the sale, claiming it had just received an appraisal valuing the house at $440,000.

A couple of days later, a Blackstone representative offered Muzi $440,000.

"That house is not worth $440,000 on its best day," said Muzi, who works for Lexus in the automotive industry. "It's a whole twisted mix. The way I see it, it's just another run-up like we went through five years ago."

Although Muzi benefited from Blackstone's lofty offer, he fears the company is pricing other buyers out — at a time when the inventory of homes for sale is at its lowest level in a decade.

Some experts also contend that the "Blackstone effect" could cause banks to start to reject short sale offers and loan modifications to struggling borrowers, in favor of Blackstone or Colony money.

That is what happened to Janille McCall.

McCall tried to negotiate a short sale on her suburban Orlando home to avoid the scar of a default on her credit. She found a buyer who was pre-approved by the bank to borrow $225,000 and made an offer of $180,000. A contract was signed in April.

But Bank of America rejected the bid, and Blackstone bought the home for $194,000 at a Seminole County auction June 4. The hedge fund bought six other foreclosures at auction that day.

"We kept trying to reason with the bank," McCall said. "But they dragged their feet and dragged their feet and ultimately never went for it."

Buying and holding

Companies like Blackstone and Colony expect to collect rents on the homes they have bought, but their real windfall could come in three or four years, when they can sell the homes at a profit.

That buy-and-hold strategy comes as demand for residential rentals across Southwest Florida has climbed at one of the fastest paces in the nation.

Many of those renters have little choice but to sign leases, because they were evicted from homes during the foreclosure crisis and have not established enough credit to buy again.

Blackstone's rental arm, Invitation Homes, now has 212 single-family houses in the Sarasota-Bradenton area listed for rent on its website. The monthly rates range from $895 to $4,200.

"People still want to get into a single-family house — what they might not be able to do is purchase," said Eric Elder, a spokesman for Blackstone's Invitation Homes. "People want the lifestyle, but they're not in a position to buy."

Elder expects his company's home acquisitions to continue for at least the near future.

"There's no magic line you can reach out and touch and say it's going to end on Dec. 13," Elder said. "It's kind of a cloudy window right now, with supply and demand. It's really all based market-by-market. We haven't abandoned our business model."

The operation has kept contractors busy because many of the homes require sprucing up and repairs to command higher rents.

But the lag between Blackstone's purchases and finding tenants could be spurring unintended consequences, including squatting, which became prevalent at the height of the foreclosure crisis.

Wes Kirkpatrick came face-to-face with the phenomenon this year when he sold his Kissimmee home to Blackstone to downsize after a divorce.

When Kirkpatrick left, squatters moved in.

His neighbors did not know where to turn to for help, and some experts suspect Blackstone could unintentionally be sparking the trend again.

"These investment companies open the door to people that don't belong there," Kirkpatrick said. "And you can't reach anybody from this massive company to notify them."

Shaky ground ahead

Most analysts expect the investment firms to sell their collections of homes when interest rates increase, which would make other financial investments more attractive.

That exit strategy could include selling properties in packages — as real estate investment trusts or by securitizing them in the way residential mortgage-backed securities are processed, analysts predict.

By sheer volume, the companies also can set market values on both rental rates short-term and home values when they wish to sell, said Joe Adamaitis, president of the Gulf Coast Mortgage Bankers Association.

But the firms could also cause the market to crash if they decided to suddenly flood it with inventory, Adamaitis said.

If any unexpected variables derail the economy, he believes the hedge funds could send the housing market into another slump.

That could be triggered by a fast rise in interest rates, an unexpected slow-down in the overall economy, or if people simply cannot afford the homes these groups want to sell and rent at much higher prices.

In the meantime, both companies have continued to raise money to fuel future purchases.

Blackstone this spring borrowed $2 billion from lenders, including Deutsche Bank and Bank of America, to help finance its single-family investments — more than tripling the size of its previous debt.

The firm has now spent an estimated $4.5 billion buying real estate.

Colony, meanwhile, has planned an initial public offering of its rental home division in the hopes of raising as much as $260 million.

In the past six months, Colony spent $177 million buying 1,242 Florida homes. Nationwide, it has invested $1.2 billion for nearly 8,800 houses in nine states, according to a recent U.S. Securities and Exchange Commission filing.

"This is not your fathers' housing market anymore," Adamaitis said. "It's a whole new ballgame because these guys are everywhere."

<p>Two of the largest real estate investors in the country are manipulating home values across Southwest Florida through rapid price inflations that could form another bubble here, an analysis shows.</p><p>The Blackstone Group and rival Colony Capital have bought 522 single-family homes from Parrish to North Port since last fall, spending nearly $84 million on those deals, according to a Herald-Tribune review of property records.</p><p>The shopping spree — involving prices that are tens of thousands of dollars above free-market norms — is part of a larger plan by the two giant hedge funds to soak up an already tight housing stock, convert properties into rentals and ultimately dictate area rents.</p><p>The strategy has created a slew of potentially adverse impacts — from fewer short-sale approvals to a rise in home squatters and bidding wars among buyers — all resulting in what some analysts consider dangerously false inflation.</p><p>Most notably, experts fear that the private equity firms are squeezing traditional buyers out of the market through conditions that mimic those of the bubble-bust cycle that shook Florida's economy six years ago.</p><p>"They're out to buy as many homes as they can, and price is no longer a factor," said Jack McCabe, a real estate consultant in Deerfield Beach. </p><p>"We're shifting from a market controlled by individuals to one that's controlled by institutions, and that's very dangerous. They have great potential to manipulate prices."</p><p>Affiliates of Wall Street's Blackstone Group began buying real estate in Southwest Florida in October as part of a larger plan to acquire as many as 25,000 distressed single-family homes nationwide — residue of the Great Recession.</p><p>Its top U.S. competitor, California investment giant Colony Capital, joined Blackstone at the auction block this spring.</p><p>In all, Blackstone has spent $37.56 million in Manatee County acquiring 219 single-family homes — at an average price of $171,491.</p><p>It snapped up another 175 houses in Sarasota County, shelling out $23.68 million, or some $135,313 per property, according to a Herald-Tribune review of court records.</p><p>Colony, which began buying properties here after Blackstone and has been more active than its rival of late, has bought 88 properties in Manatee for a total of $15.6 million, at an average cost of $177,302 per home.</p><p>In Sarasota County, Colony has struck deals on 40 single-family homes for $7.03 million — $175,843 per deal.</p><p>If the Blackstone and Colony deals sound ambitious, it's because they are.</p><p>The 522 purchases by just these two companies during the past eight months equal roughly 9 percent of all the single-family homes in Southwest Florida that changed hands in that time, the Herald-Tribune analysis reveals.</p><p>Smaller copycat investors, including New York's Fundamental REO and Minnesota-based Harbors Investment Corp., have picked up hundreds more homes — pushing the corporate control of the market to higher levels than perhaps ever before.</p><p>While the purchases began as self-financed deals by well-heeled investment firms, lately the institutions have turned to banks for capital, borrowing billions to finance their deals.</p><p>At the same time, what started as bargain-basement buys at foreclosure auctions has shifted to higher-priced short sales, traditional Realtor listings and even purchases from local flippers. </p><p>If they continue, the deals could have widespread ramifications for individual buyers.</p><p><b>Outgunned</b></p><p>Most troubling to some, the firms routinely outbid owner-occupiers by paying significantly more for houses than what the same properties fetched just months earlier.</p><p>Colony, for instance, bought one home in May for $172,000. The same residence sold the previous November for $64,000 — a markup of 275 percent in six months.</p><p>The two-bedroom, one-bath home measuring 1,013 square feet was built in 1956 and valued by the county at $66,500 last year.</p><p>Colony took the same tack when it bought a home in Venice in April for $136,000 — an appreciation of $62,500 over its last sale, shortly before Christmas. Then, it sold for $73,500.</p><p>The company has done the same in Sarasota, with properties on Fiesta Drive and elsewhere; similar buying patterns can be seen across Colony's local transactions, records show.</p><p>Representatives from Colony Capital could not be reached for comment.</p><p>A spokesman for Blackstone's home buying and rental subsidiary said the firm does "an incredible amount of due diligence on every purchase."</p><p>But the Herald-Tribune's analysis shows Blackstone, too, has overpaid — sometimes significantly compared with market rates — for many of its homes.</p><p>In May, it paid $265,000 for a five-bedroom in Sarasota that was built in the 1980s. That same house changed hands just two months earlier for $185,000.</p><p>Blackstone spent $142,000 for a home on Radnor Place in Sarasota in January. Less than two months earlier, the 1,400-square-foot house went for $79,000.</p><p>More recently, Blackstone bought a three-bedroom Hawkshead Park house for $270,000. Five months earlier, another investor paid $200,000.</p><p>With dozens of similar examples of Blackstone purchases in excess of market rates, some Realtors fear the region could again be crippled by the artificial price appreciation that was a staple of the mid-2000s real estate run-up.</p><p>"These purchases are ridiculous," said Robert Goldman, a Realtor, real estate attorney and developer in Venice. "I think the strategy is going to backfire in their face. I just don't see how they can charge enough rent to recover these prices."</p><p><b>Skewed prices</b></p><p>Already market watchers say they are concerned that Blackstone's purchase prices have influenced so-called "comparables" — similar transactions that appraisers use to value homes.</p><p>The more houses Blackstone buys at inflated prices, experts say, the more those prices will be used as a gauge to the value of all other similar properties nearby — a phenomenon that could skew prices throughout the market.</p><p>Institutional deals have also resulted in a sharp decline in housing inventory, prompting some buyers to make panicked offers out of fear that they will be priced out, said Drew Peterson, a foreclosure specialist with the Re/Max Alliance Group in Sarasota.</p><p>"I never thought this was a good thing for the housing market, and I'm concerned now more than ever," Peterson said.</p><p>"It's false inflation. These homes are becoming less affordable, and people are buying houses because they feel like they have to."</p><p>Peterson said institutional investors like Colony and Blackstone often rely on local real estate agents to scout properties.</p><p>But those agents may use formulas not based on worth, but on what a home can produce from collected monthly rents. The target is 8 to 12 percent.</p><p>Bulk buyers last year paid an estimated 45 percent more than assessed value for the 5,289 foreclosures they bought in Florida. As more of those institutions now turn to short sales and traditional listings, industry analysts believe prices will balloon marketwide.</p><p>"These big companies are paying way over market in general," said Shannon Moore, broker and owner of Green Lion Realty, which works with smaller competing investors in North Port. "What they're paying at auction is ridiculous. It definitely seems like they could be creating another false bubble."</p><p><b>Not on its best day</b></p><p>Philip Muzi sold his home, in the Wellington area of West Palm Beach, to a Blackstone subsidiary earlier this year.</p><p>He bought it new in 1999 for $250,000, and later added a pool. Even with five bedrooms, three bathrooms and 3,000 square feet under roof, it is among the smaller homes in his neighborhood.</p><p>When Muzi fell behind on his Bank of America loan, he tried a short sale but was unsuccessful on three different occasions. Bank of America ultimately transferred the mortgage to Bayview Loan Processing, in Miami.</p><p>Muzi got an offer to sell for $360,000, but Bayview rejected the sale, claiming it had just received an appraisal valuing the house at $440,000.</p><p>A couple of days later, a Blackstone representative offered Muzi $440,000.</p><p>"That house is not worth $440,000 on its best day," said Muzi, who works for Lexus in the automotive industry. "It's a whole twisted mix. The way I see it, it's just another run-up like we went through five years ago."</p><p>Although Muzi benefited from Blackstone's lofty offer, he fears the company is pricing other buyers out — at a time when the inventory of homes for sale is at its lowest level in a decade.</p><p>Some experts also contend that the "Blackstone effect" could cause banks to start to reject short sale offers and loan modifications to struggling borrowers, in favor of Blackstone or Colony money.</p><p>That is what happened to Janille McCall.</p><p>McCall tried to negotiate a short sale on her suburban Orlando home to avoid the scar of a default on her credit. She found a buyer who was pre-approved by the bank to borrow $225,000 and made an offer of $180,000. A contract was signed in April.</p><p>But Bank of America rejected the bid, and Blackstone bought the home for $194,000 at a Seminole County auction June 4. The hedge fund bought six other foreclosures at auction that day.</p><p>"We kept trying to reason with the bank," McCall said. "But they dragged their feet and dragged their feet and ultimately never went for it."</p><p><b>Buying and holding</b></p><p>Companies like Blackstone and Colony expect to collect rents on the homes they have bought, but their real windfall could come in three or four years, when they can sell the homes at a profit.</p><p>That buy-and-hold strategy comes as demand for residential rentals across Southwest Florida has climbed at one of the fastest paces in the nation.</p><p>Regionally, rentals have a 97 percent occupancy rate, according to the apartment data tracking firm Axiometrics Inc.</p><p>Many of those renters have little choice but to sign leases, because they were evicted from homes during the foreclosure crisis and have not established enough credit to buy again.</p><p>Blackstone's rental arm, Invitation Homes, now has 212 single-family houses in the Sarasota-Bradenton area listed for rent on its website. The monthly rates range from $895 to $4,200.</p><p>"People still want to get into a single-family house — what they might not be able to do is purchase," said Eric Elder, a spokesman for Blackstone's Invitation Homes. "People want the lifestyle, but they're not in a position to buy."</p><p>Elder expects his company's home acquisitions to continue for at least the near future.</p><p>"There's no magic line you can reach out and touch and say it's going to end on Dec. 13," Elder said. "It's kind of a cloudy window right now, with supply and demand. It's really all based market-by-market. We haven't abandoned our business model."</p><p>The operation has kept contractors busy because many of the homes require sprucing up and repairs to command higher rents.</p><p>But the lag between Blackstone's purchases and finding tenants could be spurring unintended consequences, including squatting, which became prevalent at the height of the foreclosure crisis.</p><p>Wes Kirkpatrick came face-to-face with the phenomenon this year when he sold his Kissimmee home to Blackstone to downsize after a divorce.</p><p>When Kirkpatrick left, squatters moved in.</p><p>His neighbors did not know where to turn to for help, and some experts suspect Blackstone could unintentionally be sparking the trend again.</p><p>"These investment companies open the door to people that don't belong there," Kirkpatrick said. "And you can't reach anybody from this massive company to notify them."</p><p><b>Shaky ground ahead</b></p><p>Most analysts expect the investment firms to sell their collections of homes when interest rates increase, which would make other financial investments more attractive.</p><p>That exit strategy could include selling properties in packages — as real estate investment trusts or by securitizing them in the way residential mortgage-backed securities are processed, analysts predict.</p><p>By sheer volume, the companies also can set market values on both rental rates short-term and home values when they wish to sell, said Joe Adamaitis, president of the Gulf Coast Mortgage Bankers Association.</p><p>But the firms could also cause the market to crash if they decided to suddenly flood it with inventory, Adamaitis said.</p><p>If any unexpected variables derail the economy, he believes the hedge funds could send the housing market into another slump.</p><p>That could be triggered by a fast rise in interest rates, an unexpected slow-down in the overall economy, or if people simply cannot afford the homes these groups want to sell and rent at much higher prices.</p><p>In the meantime, both companies have continued to raise money to fuel future purchases.</p><p>Blackstone this spring borrowed $2 billion from lenders, including Deutsche Bank and Bank of America, to help finance its single-family investments — more than tripling the size of its previous debt.</p><p>The firm has now spent an estimated $4.5 billion buying real estate.</p><p>Colony, meanwhile, has planned an initial public offering of its rental home division in the hopes of raising as much as $260 million.</p><p>In the past six months, Colony spent $177 million buying 1,242 Florida homes. Nationwide, it has invested $1.2 billion for nearly 8,800 houses in nine states, according to a recent U.S. Securities and Exchange Commission filing.</p><p>"This is not your fathers' housing market anymore," Adamaitis said. "It's a whole new ballgame because these guys are everywhere."</p>